Should the value of De Minimis benefits be factored in retirement pay?
As the close of year 2016 comes, we celebrate another year of hard work and a year closer to our retirement. As retirement is an inevitable event for majority of Filipinos, it is just and reasonable that retiring employees will receive due benefits to support them after serving their employers for years and continue to enjoy one of the fruits of their hard work, even in their twilight years. And to aid employers and employees alike, it is timely that we revisit the minimum components of the employees’ retirement pay, as set by existing applicable laws and jurisprudence.
Under Republic Act ( RA) No. 7641, as amended, the minimum retirement pay shall be equivalent to one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one (1) whole year.
AMOUNT OF RETIREMENT PAY
For the purpose of computing retirement pay, unless the parties provide for broader inclusion, “onehalf month salary” shall include all of the following:
• Fifteen (15) days salary based on the latest salary rate;
• Cash equivalent of five (5) days of service incentive leave;
• One-twelfth (1/12) of the thirteenth-month pay. (1/12 x 365/12 = .083 x 30.41 = 2.52)
In Capitol Wireless, Inc. v. Honorable Secretary Ma. Nieves R. Confesor, the Supreme Court categorically declared that “one-half month salary” is equivalent to 22.5 days. (G.R. No. 117174, 13 November 1996, 264 SCRA 68)
With the formula discussed above, a question arises as to whether employers should include the value of De Minimis benefits in the computation of retirement pay for their employees?
BASIC SALARY AS COMPONENT OF THE COMPUTATION FOR RETIREMENT PAY
The latest “salary rate” or “basic salary” is used to distinguish wage or salary from “fringe benefits” which are not integrated into “basic salary” for certain specific purposes.
In San Miguel Corporation v. Inciong ( G. R. No. L- 49774, 24 February 1981,103 SCRA 139), the catch-all phrase “allowances” and “monetary benefits” which are deemed not considered or integrated as part of “basic salary” was construed to refer to “any and all additions which may be in the form of allowances or ‘fringe’ benefits.” These fringe benefits include payments for sick leave, vacation leave, or maternity leave; premium pay for work performed on rest day and special holidays; premium pay for regular holidays and night differential pay; and cost of living allowances. (Philippine Duplicators, Inc. v. NLRC, G. R. No. 110068, 11 November 1993, 227 SCRA 747).
“Basic salary” thus only refers to all remunerations paid by an employer to his employees for services rendered during normal working days and hours, whether such payments are fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, and includes the fair and reasonable value, as determined by the Secretary of Labor and Employment, of food, lodging, or other ( nonde minimis) facilities customarily furnished by the employer to his employee. The term does not include cost of living allowance, profit- sharing payments, and other monetary benefits which are not considered as part of or integrated into the regular salary of the employees. (Section 5, Rule II of the Rules Implementing the New Retirement Law).
In Reyes v. NLRC ( G. R. No. 160233, 8 August 2007, 529 SCRA 487), the Supreme Court further clarified that basic salary is that amount of money received by an employee which has a clear, direct, or necessary relation to the amount of work he actually performed. Thus in the same case declared that any compensation or remuneration which are deemed not part of the basic pay is excluded as basis in the computation of retirement pay.
CATEGORIZATION OF DE MINIMIS BENEFITS
“De minimis benefits,” on the other hand, refers to facilities or privileges of relatively small value which are not considered compensation subject to income tax (Section 1 (3), Revenue Regulations No. 102008), and are offered or furnished by the employer merely “as a means of promoting the health, goodwill, contentment, or efficiency of his employees.” They are granted by the employer on top of the employee’s basic compensation.
De minimis benefits are specifically enumerated under rules and regulations promulgated by the Department of Finance (specifically Revenue Regulations No. 5- 2011, 8-2012, 1-2015), to wit:
• Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;
• Monetized value of vacation and sick leave credits paid to government officials and employees;
• Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month;
• Rice subsidy of P1,500 or one ( 1) sack of 50 kg. rice per month amounting to not more than P1,500;
• Uniform and Clothing allowance not exceeding P5,000 per annum;
• Actual medical assistance, e.g. medical allowance to cover medical and health care needs, annual medical/executive checkup, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;
• Laundry allowance not exceeding P300 per month;
• Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;
• Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
• Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; and
• Benefits received by an employee by virtue of a collective bargaining agreement ( CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000.00 per employee per taxable year.
De minimis benefits are specifically enumerated and are given an amount ceiling (for tax exemption purposes), which if exceeded will now be subjected, as to the excess thereof, to withholding tax with respect to rank and file employees, and to fringe benefit tax with respect to supervisory and managerial employees.
Evidently, fringe and de minimis benefits are of similar nature and may be categorized in the same way for retirement pay computation purposes.
DE MINIMIS AND FRINGE BENEFITS
Generally, employers should not factor in the value of de minimis benefits given to their retiring employees, since it is granted over and beyond their basic salary and it does not have any clear, direct, or necessary relation to the amount of work they actually perform. To emphasize it is given merely as a means of promoting the health, goodwill, contentment, or efficiency of employees.
De minimis benefits can be included in the umbrella of “allowances” and “monetary benefits,” much like fringe benefits, not contemplated in the definition of “basic salary” for purposes of computing retirement pay.
By and large, the value of de minimis benefits given should not be included in the computation of the retirement pay as it is deemed not considered or integrated as part of “basic salary.”
However, when de minimis benefits are considered in a collective bargaining agreement or other agreements or through “company practice” as part of the basic salary and/or in the computation of retirement pay, then the employer is constrained under the law to factor it in. Accordingly, in some cases the formula above may include “other benefits as may be agreed upon by the employer and employee for inclusion.” (Reyes v. NLRC, supra.)
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.